THE BUDGET AGREEMENT

October 1, 1990

THE BUDGET agreement announced yesterday is imperfect, but the solid deficit reduction it promises is more important than its flaws. Some of the largest tax increases would be regressive -- but the ultimate regressive step of cutting the capital gains tax was staved off. On the benefit side, the negotiators again flinched at cutting Social Security, even though it represents a fifth of all spending.

Still, the enactment of the agreement would be a major fiscal accomplishment, a shift toward responsible policy long overdue. The president and congressional Democrats both had to abandon cherished positions to achieve it, and particularly so close to the election they deserve great credit for having done so. The compromise is fair; the members must show the same courage as their leaders and pass it. The alternative is not just the insupportable chaos of Gramm-Rudman; that would not last. If the compromise fails, the deficit continues to erode the ability to govern.

The excise tax increases the parties contemplate on gasoline, energy generally, alcohol and tobacco would be felt less by rich than poor. The flip side is that they would be socially useful, in stimulating energy conservation and possibly deterring alcohol and tobacco consumption. An income tax increase would have been fairer. The president resisted, in effect trading his proposal to cut the capital gains tax in order to keep the income tax rates as they are. Still, the plan contains a sleeper; it would raise $18 billion over five years, more than the alcohol and tobacco taxes combined, by limiting the itemized deductions upper-income households can take -- in effect the same as a rate increase. It would also require high earners to pay higher Medicare taxes, and contains protection for about a fifth of the poor -- working families with children -- in the form of an increase in the earned-income tax credit. Overall, an acceptable if not exemplary list -- and the best that can likely be achieved.

In benefits, having balked at cutting Social Security, the negotiators went after the same population by proposing large savings in Medicare, in part by raising the premiums, deductibles and the rest that patients must pay. At one point both parties were contemplating tilting these payments so that the better-off would pay most; for the usual reason of fear of the political consequences, they abandoned this good idea. The poorest would still be protected; for people below the poverty line, the states must make such payments (in part with federal matching funds) through Medicaid. Other major entitlements, notably farm supports, would also be cut.

The defense budget would be reduced in real terms, not as much as some Democrats have urged but more than the administration wanted. That seems about right to us. The range of domestic spending subject to the appropriations process would not be cut, but could rise no more than inflation. That also seems fair; it means that in budgets as tight as those ahead, if some programs prosper it will have to be at other programs' expense. Meanwhile, government workers will report to work; the great furlough threat has been suspended. It seems a shame that the politicians require such a wasteful charade to do their work, but they do. Maybe next time they could just pretend the world was ending . . . but of course that is what they did this time, too.